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| What does the The Rule of 78 mean?
The rule of 78 means that for a period of one year the customer and the creditor can calculate how much he’s going to pay/get in each stage of the payment process. The number 78 comes from adding up the months 1 + 2 + … + 11 + 12 = 78. And the way the borrower calculates how much he has to pay in any given month of the year is like this: first month is 12/78 cause there are 11 months left, second month 11/78 cause there are 12 months left now this is how it goes down until 1/78. So in common terms the customer pays more interest in the first months and less in the latest months. Also there’s a serious disadvantage if the customer decides to pay early then he’ll pay a very big interest fee. The Rule of 78 is illegal to use in a period longer then five year, and some states in the USA have banned the usage of this system.
This rule is mainly used whenever you decide to pay off early your loan, this is an insurance for the creditors to make profit. The best way to picture this rule is to understand that the interest rate is not evenly spanned during the time in which you pay your loan. How creditors think is like this in the first months you pay more interests because you have more money from which you can pay. | | | | |
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